Steelmakers Facing Rising Power Prices

The Electricity Regulatory Authority of Vietnam under the Ministry of Industry and Trade recently planned to submit a new electricity pricing mechanism to the Government where prices for steel industry are expected to go up. Vietnam Business Forum interviewed Mr Nguyen Tien Nghi, Standing Vice Chairman of the Vietnam Steel Association (VSA), on this issue. Anh Phuong reports.

Why did the electricity industry want to apply power price hikes just to the steel industry?

This is not the first time the domestic steel industry faces power price hikes. Indeed, the Tax Policy Department under the Ministry of Finance suggested the Prime Minister levy an export duty of 3 percent on steel ingots and export steel in 2011. The ministry explained that the profit of the steel industry was partly created by “low power prices, some US$10 - 15 per tonne” or about VND214,000 - 321,000, depending on level of technologies. According to calculations, the price for EVN to break even is VND1,777 per KWh rather than average selling price of VND1,242 per KWh in 2010. In 2011, if this policy had been applied, it would have been a harsh drag on steel production or even killed the steel industry. Fully aware of this, VSA immediately sent a written request to the Prime Minister, asking for a halt and review of power price increase request submitted by the Ministry of Finance and accepted by the Prime Minister.

However, if this policy had been enforced, it would have been unfair and unfavourable to steelmakers, especially when Vietnamese companies were struggling to withstand economic recession. Besides, some arguments for the new power price hike specifically applied to the steel industry are not thorough. Specifically, the average electricity selling price for steelmakers and cement producers was below cost, causing a loss of VND2,547 billion for power producers. In late 2011, EVN hiked power prices for production activities to VND1,304 and consumer prices to VND1,400 per kWh. The power group argued that consumer power prices are higher than power prices for production activities; thus, people are paying for manufacturers, given the difference.

In another aspect, in my opinion, EVN is being “probed” by many agencies for a lot of problems. Specifically, it invested a lot in non-core businesses or received huge capital from the State Budget, but the outcome fell short of expectations. At present, EVN is facing difficulties and hoping to kick them to third parties to shoulder less responsibility. Steelmakers are the target, as they consume a lot of energy but pay low prices.

It is said that many foreign steelmakers are benefiting from Vietnam's cheap electricity. What do you think about this?

This problem exists not only in the steel industry but also many other industries because foreign investors have access to the Party and State’s policies on FDI attraction. Indeed, there are many foreign steelmakers. But, it is not true to say that foreign steelmakers are benefiting from Vietnam's cheap electricity because major projects are in the first state of construction and have yet to start operations. For example, the US$22 billion steel project invested by Taiwanese-led Hung Nghiep Formosa Iron and Steel Co., Ltd in Ha Tinh province is one of the biggest FDI projects, but it is just now building factories and has not started production. In early April, a VSA delegation and I paid a working visit to this project. To my knowledge, the initial investment capital of this project was US$15 billion, divided into two stages, with the first using US$7 billion and the second investing US$8 billion. But, the consortium of investors clearly informed that they would build their own thermal power plant to supply their production facilities rather than use local sources. In addition, investors are also building Son Duong deepwater port project to accommodate ships of 300,000 tonnes and carry coal for the thermal power plant. As it is now a lowland region, the ground will be elevated by 3 metres. Currently, the work is 39 percent completed.

Another big project invested by Tata Group (India) and Vietnam Steel Corporation (VNSteel) with an annual capacity of 5 million tonnes and at a total investment of US$5 billion is in the process of negotiation, with licence pending.

A steel joint venture project registered by Lion Group (Malaysia) and Vietnam Shipbuilding Industry Group (Vinashin) had its license revoked. China-invested Guang Lian steel plant project in Dung Quat (Quang Ngai province) changed investors four time since 2007, but still hasn’t kicked off.

Therefore, it is not accurate to say that foreign investors are benefiting from cheap electricity in Vietnam. In my opinion, EVN’s electricity is mainly used by domestic enterprises.

Before the reaction of mass media and enterprises, the Electricity Regulatory Authority of Vietnam considered and suspended power price hikes and mechanisms specifically applied to steel and cement industries. However, in the long run, the steel industry and other economic sectors as well will have to accept market-based power prices. So, how do you expect the industry to be able to sustain development?

It is true that the Government, the Ministry of Industry and Trade and the Ministry of Finance have not approved the power price hike scheme. However, the prices will be raised in an appropriate time, aiming at ensuring the interests of enterprises and social security in accordance with Decision 24/2011/QD-TTg. However, in the long run, the steel industry will have to change production lines, apply advanced sciences and technologies, and get rid of backward facilities to make a sustainable profit. Specifically, the steel industry needs to improve technical standards on par with developed countries in the world, reaching 100 tonnes a batch. Meanwhile, according to the current standards introduced by the Ministry of Trade and Industry, a batch of 50 tonnes of steel meets standards. Presently, a steel mill is testing 100 tonnes a batch capacity but this has not been completed. In April 2012, the construction started on a steel mill with a batch output of 100 tonnes in Ninh Binh province. This facility meets Italy’s G7 standards.

Besides, according to advanced standards, a steel mill is allowed to consume only 28 - 32 kilos of oil for a tonne of steel produced. If any plant in Vietnam uses more than that, it must consider changing technologies or suspending operations. To my knowledge, many steel plants are using 40 - 50 kilos to produce a tonne of steel. These facilities will be eliminated sooner or later in the future. In addition, according to global metal consumption standard, a kilo of finished steel requires 1.03 - 1.04 kilos of metals, but the rate in Vietnam is 1.07 - 1.08 kilos, even 1.1 kilos. Facilities with this excessive consumption also need to change their technologies.